Another Dull Fiscal at El Paso

Zacks

El Paso Corporation (:EP) announced its fourth-quarter 2011 operating earnings of 28 cents per share, in line with the Zacks Consensus Estimate. The results of the company were higher than year-ago earnings of 20 cents per share.

GAAP earnings per share in the quarter were 24 cents versus 9 cents in the fourth quarter of 2010.

The difference between GAAP and operating earnings during the reported quarter was due to the impact of a few one-time items. These are an 8 cent impact for E&P financial derivatives, 1 cent merger related costs, 4 cents due to the tax rate and a tax gain of 9 cents for the conversion of subsidy to LLC.

El Paso's 2011 operating earnings were $1.00 per share compared with 98 cents per share reported in 2010. Fiscal 2011 earnings missed the Zacks Consensus Estimate of $1.02.

Earnings per share, as per GAAP, in 2011 were 18 cents versus $1.00 in 2010.

Full year earnings were negatively impacted by 20 cents due to ceiling test charges, 4 cents for E&P financial derivatives, a loss of 14 cents from debt extinguishment,10 cents for loss on interest swaps, 38 cent loss on Ruby investments, 2 cents for merger related costs, 3 cent impact due to change in fair value of legacy indemnification and a tax gain of 9 cents for the conversion of subsidy to LLC.

Revenue

Total revenue of the company in the fourth quarter was $1,232 million versus $984 million in the year-ago period, which reflects a growth of 25.2%.

Quarterly revenue was lower than the Zacks Consensus Estimate of $1,266.

The company generated total revenue of $4,860 million in 2011, down from $4,616 million reported in 2010.

Total 2011 revenue was also lower than the Zacks Consensus Estimate of $5,251 million.

Quarterly Highlights

El Paso’s cash operating costs for the fourth quarter of 2011 averaged $1.76 per thousand cubic feet (Mcfe), down from $1.84 per Mcfe for the same period in 2010, primarily due to increased production volumes.

Total operating expenses of the company at the end of the fourth quarter of 2011 were $815 million versus $603 million in the year-ago period. The rise in expenses was attributable to higher operation and maintenance expenses, while cost of products and services dipped marginally from the year-ago period.

Higher operating expenses were nullified by the increase in the total revenue of the company. Operating income in the fourth quarter 2011 increased to $417 million from $381 million from the year-ago quarter.

Annual Highlights

During the year the company experienced a substantial year-over-year rise in total operating expenses. The expenses increased by 44.9% from the year-ago level mainly due to ceiling test changes and higher operating and maintenance expenses.

Higher operating expenses pulled down the operating income of the company despite a marginal growth in revenue in the fiscal. Operating income in 2011 was down to $1,132 million from $2,043 million in 2010.

Production and Realized Price

El Paso’s production in 2011 averaged 838 million cubic feet per day (MMcfe/d), representing an increase of 56 MMcfe/d from 2010 production volumes, which averaged 782 MMcfe/d.

Pipeline throughput volumes were up 4.5% to 18,343 billion British thermal units per day (BBtu/d) in 2010, from 17,558 BBtu/d in 2010.

Realized natural gas and oil and condensate prices, including financial derivatives, in 2011 averaged $5.44 per Mcf, down 4.0% and $90.23 per barrel, up 26.8%, respectively, both on a year-over-year basis.

Financial Update

Cash and cash equivalents of the company as of December 31, 2011 were $194 million decreasing from $347 million as of December 31, 2010.

Capital expenditures and contributions to equity investments in 2011 were $3,769 million versus $3,981 million in 2010.

Cash flow from operations activities for 2011 was $2,101 million versus $1,753 million in 2010.

Dividend

On February 23, 2012, the board of directors of El Paso announced a dividend of 1 cent per share. The dividend is payable on April 2, 2012, to shareholders of record on March 5, 2012.

Peer Comparison

Williams Companies(WMB) competes directly with El Paso Corporation. The former announced operating earnings for the fourth quarter 2011 of 36 cents per share, falling below the Zacks Consensus Estimate of 30 cents but beating the year-ago earnings of 30 cents per share.

Fiscal 2011 ongoing earnings came in at $1.23 per share, beating the year-ago figure of 91 cents per share but falling short of the Zacks Consensus Estimate of $1.57 per share.

Our View

The company has failed to meet our expectation mainly due to escalating operating expenses.

The company finally decided to spin off its exploration and production unit for $7.15 billion. The sale of this unit depends on the close of the merger deal of Kinder Morgan Inc. (KMI) and El Paso. The company’s carry forward net loss to a great extent offset the tax associated with the sale of this unit.  As such, sale proceeds could be utilized to lower debts.

Based in Houston, Texas, El Paso Corporation involves in the natural gas transmission and in the exploration and production sectors of the energy industry. The company primarily operates in United States and has some exposure in Brazil and Egypt.  El Paso Corporation currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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